It is never easy to pick which way the market is going to go, particularly right now in the US where a single comment from the Federal Reserve Governor has caused a massive stir among investors. Join us this week as we jump into the cues and clues we see right now and how these might affect your view:
What Kind of Data is Important?
In a strong and trending market, regular data releases are not typically that impactful unless they come as a total shock to the market. The choppier market conditions we have seen since late 2021 have brought much more attention to the release of economic data. Inflation is the word on everyone’s lips and there is a constant struggle in the market trying to infer what will happen down the track due to what we see today. We have particularly been hearing a lot about CPI and PPI over the last few months as key indicators of inflation.
Host Andrew Baxter explains that recent decreasing energy and commodity prices has led to easing CPI and PPI more recently which is generally good news for investors worried about the trajectory of the market. Continue to look for key pieces of news which may indicate interest rate decisions and you will see what is driving the market at the moment.
Earnings Season and Consumer Sentiment
The US earnings season is always an interesting time as a trader in the market. By analyzing earnings data, we can gain a better understanding of how various economic forces are impacting the companies in which we have invested. The most recent earnings season in the US was quite interesting, with a large portion of companies outperforming their expectations. It’s vital to understand, as Andrew and Mitch point out, that the expectations were greatly lowered to begin with by virtue of drops in share prices prior to the releases. Tied in with consumer sentiment, though earnings were better than expected, the problem with inflation is that when it slows down, it doesn’t bring prices down, it simply means they are not increasing at the same rate.
In effect, consumers are still paying more. Higher grocery bills and other day to day expenses hurt consumer sentiment which can certainly have a flow on effect into the market.
Employment is always a major talking point in the face of some market headwinds. Though employment is quite high both in Australia and the US, there are some nuances worth a look. We saw the trend of a lot of people cycling into retirement when they had a solid opportunity and now we have the growing trend of “quiet quitting” where employees are choosing to exit the labour market due to any number of reasons. Once we see some wage growth, Host Andrew Baxter expects to see many of them filter back into the workforce.
Overall, the labour market is very healthy on paper, but if you delve in a little bit deeper you can see that there are hundreds of thousands of vacant jobs and more people on government benefits than prior to the pandemic in Australia but that is not an option in the US due to the relatively lacking welfare system.
Some Red Flags
The midterm elections are on the horizon which could cause some turbulence in the market. Host Andrew Baxter notes a new bill has just been passed in the US labelled the Inflation Reduction Act with the aim of bringing prices down for American consumers. Although this may bode well as far as intention and a headline, the reality is it is very difficult for governments to have any direct and significant impact on price pressures in the market. With policies like increased capability of hospitals to negotiate on medical supplies it is hard to see any real measurable impact on inflation and the back pocket of everyday American consumers.
Housing starts and construction data provides valuable insight into a key market in any economy. Host Andrew Baxter notes that we have seen a fall in new housing starts and a decrease in new construction in the US. This is a common theme in an environment where interest rates are going up, hurting both house prices and the construction sector.
Where to Look Now
As a seasoned veteran in the trading space, Host Andrew Baxter’s advice is to not get too focused on forecasting because let’s face it – it’s just an educated guess. In order to adapt to the market you need to look around at what is happening now and trade around that information. A key component of this is sifting through what’s important and what’s not which is not always intuitive. It takes lots of practice but once you get a solid grasp on the market and the things that drive it, the results speak for themselves. Fundamental analysis is a key understanding to take advantage of opportunities in the market. Our key tip to sign off – always manage your risk!